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  Dr. Gautam Sen vs. CCIT (Bombay High Court)
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Income tax Officer-9(2)(3) Room No.-225, 2nd Floor, Aaykar Bhavan, MK Road Mumbai-400 020. Vs. M/s. Man Foods Pvt. Ltd. 1st Floor, Vrindavan Society Saraswati Colony, Meera Baug, Santacruz (W),Mumbai.
July, 23rd 2015
                          , `'  
                        ,    ,                                                ,   
       Before S/Sh. Joginder Singh,Judicial Member & Rajendra,Accountant Member
        /.ITA No.7150/Mum/2012,  /Assessment Year-2009-10
      Income tax Officer-9(2)(3)              M/s. Man Foods Pvt. Ltd.
      Room No.-225, 2nd Floor,                1st Floor, Vrindavan Society
      Aaykar Bhavan, MK Road              Vs Saraswati Colony, Meera Baug,
      Mumbai-400 020.                         Santacruz (W),Mumbai.
                                              PAN: AADCM 8861 H
            ( /Appellant)                      (  / Respondent)
                    /Assessee by                        : Shri Suresh N. Otwani
                      / Revenue by                      :Shri Asghar Zain V.P.
                         / Date of Hearing                            :   08 -07-2015
                       / Date of Pronouncement                        :   22 -07-2015
                      , 1961   254(1)                                
                   Order u/s.254(1)of the Inco me-tax Act,1961(Act)
                        PER RAJENDRA, AM-
Challenging the order dated 25.9.2012 of the CIT(A)-20, Mumbai,the Assessing Officer(AO) has
raised following Grounds of Appeal:
       1.Whether On the facts and in the circumstances of the case and in law, the ( Ld.CIT(A) was
       correct in deleting the disallowance of expenses claimed of Rs.6,87,3501- even though the
       assessee chose not to submit any explanation in respect of query raised regarding the
       genuineness of the expenditure claimed.
       2. Whether on the facts and in the circumstances of the case and in law, the Ld.CIT(A) was
       correct in deleting Rs.3,31 ,574/- being prior period expenditure even though , assessee follows
       mercantile system of accounting.
       3. Whether on the facts and in the circumstances of the case and in law,the Ld.CIT(A) was correct
       in deleting the disallowance of Rs.8,37,979/- being expenses on account of mixing supervision
       and packing supervision in view of the fact that these payments were made to technically
       educated persons and TDS thereon should have been u/s.194J as against TDS deduction made by
       the assessee u/s.194C.
       4. Whether on the facts and in the circumstances of the case and in law, the Ld. CIT(A) was
       correct in deleting the disallowance of RS.11 ,76,080/- on account of expenses for loading and
       unloading as the provisions of section 194C of the Act are applicable in respect of these
       payments, but the assessee did not deduct TDS on the payments made.
       5. The appellant prays that the order of the CIT(A) on the grounds be set aside and that of the
       Assessing Officer be restored."
Assessee is contract manufacturer of Parle Product Biscuits with Parle Products Pvt. Ltd(PPPL).
It filed its return on 30.9.09 declaring income of 8.76 lacs.The AO completed the assessment ,
u/s.143(3) of the Act,on 19.12.11 determining the income of the assessee at Rs.57,33.990/-.

2.First Ground of appeal is about deleting the disallowance of expenses,amounting to Rs.6.87
lacs. During the assessment proceedings, the AO found that the assessee had entered into an
agreement for manufacturing of biscuits with PPPL on 4.5.07 for a period of 2 yrs.,that the
agreement contained rights/responsibilities and obligations of both the parties, that as per
agreement primary role of the assessee was to manufacture biscuits out of the raw material
supplied by PPPL , that the agreement provided for preservation of various material supplied by ,
that the assessee had debited Rs.6.87 lacs to the P&L account under the head expenditure of
Maida, sugar, broken C-box handling.The AO held that these materials were supplied by PPPL.
He directed the assessee to explain as to why the claim made by it should not be disallowed in
the light of the agreement dt.04.05. 2007.As per the AO the assessee did not furnish any
explanation in this regard.He held that the expenditure in question was not incurred for the
business of the assessee and hence was to be disallowed.
2.1.Aggrieved by the order of the AO,the assessee preferred an appeal before the First Appellate
Authority (FAA).Before him it was contented that the disputed expenditure had been incurred
towards the labour payment made, that the material was provided by PPL, that the obligation of
its uses to the precision and without any loss was on the assessee, that it had hired labourers for
handling the material during manufacturing process, that the amount was paid as service charges
to the contractor who was responsible for handling of material, that the said expenditure was
debited under the head maida, sugar, C-box handling expenses, that the expenditure had direct
nexus with the business of the assessee , that the nature of expenditure was misunderstood by the
AO.The assessee furnished the copy of the ledger account of the disputed expenses alongwith the
debit notes of the contractor.After considering the submissions of the assessee and the
assessment order,the FAA held that the material was to be unloaded/inspected/tested/
stored by the assessee ,that the expenditure relating to unloading and supervision of raw
material towards labour payment was to be borne by the assessee, that the AO had
disallowed the expenditure merely on the presumption that as per the agreement with PPPL
no expenditure was to be incurred by the assessee,that the presumption of the AO was
unfounded,that the AO had disallowed the expenditure without analyzing its nature, that
the expenditure had direct nexus with the business of the assessee,that there was no
reasonable or legal basis for disallowance of 6,87,530/- Finally he deleted the disallowance
made by the AO.
2.2.Before us,the Departmental Representative(DR)supported the order of the AO.
Authorised Representative(AR)argued that the assessee had incurred the expenditure for
carrying out its business,that expenditure had direct nexus with completing the contract
entered in to by the assessee with PPPL,that AO had ignored the terms of the agreement.
2.3. We have heard the rival submissions and perused the material before us.We find that as
per the agreement dated 04.05.2007 the assessee had to perform certain functions and for
that purpose it had incurred expenditure.The AO has not doubted the genuineness of the
expenditure. The FAA has given a finding of fact that the AO had made the disallowance
merely on presumption.The DR was not able to controvert the assertion made by the
FAA.The assessee had furnished the details of the expenditure.In these circumstances,we
are of the opinion that the order of the FAA does not require any interference from our
side.So,confirming his order we decide ground no.1 against the AO.


3.Second ground is about deleting addition of Rs.3,31,574/-.During the assessment proceedings,
the AO found that an amount of Rs.3,31,574/- had been deducted from gross receipt towards
Scrap empties recovery,He asked the assessee to explain as to why Rs.3,31,574/- should not be
added as income for the reason that the disputed amount was payable for prior period.He
observed that the expenditure pertained to earlier year whereas assessee was following
mercantile system of accounting,that the assessee had not produced bill/voucher for verification.
Finally,he disallowed the claim made by the assessee.
3.1.Against the disallowance of the expenditure the assessee contended before the FAA that the
materials for the purpose of production was supplied by the Parle, that there was an
accumulation of bags, drums and other container during the course of the year,that as per Clause
XX of the Agreement, the procedure for realisation of such empties/scrap was stipulated,that as
per the said clause empties/scrap had to be be disposed by assessee under the scrap invoice of
Parle, that since the date of agreement it did not dispose any such empties/gunny bags etc,that
instead it used the same for dispatches or same was lost/pilfered,that it was of the opinion that
since no recovery was made out of such empties/gunny bags drums etc.there would not be any
claim by PPPL,that it did not make any provisions for the year under appeal,that PPPL
approached the assessee after the end of almost a year or so and forwarded it claim for recovery
out of such empties/gunny bags,that it explained to PPPL that that the bags/containers were used
by them or was lost/damaged,that PPPL however,calculated the total recovery based on the
supplies made to the assessee deducted said amount upfront as recovery for empties/gunny bags
from the processing charges payable by it, in the month of June 2008,that at that time for the first
time assessee-company came to know about loss that it had to bear,that considering the business
exigencies it eventually booked the said expenditure in its accounts for the year 2008-09,that
during the year under reference, the scrap empties charges of Rs.3,31,574/- were recovered by
PPPL from the assessee in pursuance of the agreement,that the charges were settled and
recovered by the Parle in the year under appeal,that in the absence of any actual recovery by the
assessee the liability on the it by way of claim by PPPL was crystallised for the first time,that
the said liability was enforceable on the assessee as per the terms of the agreement in the year
under consideration,that same was correctly booked in the accounts of the company,that it was a
legitimate business expenditure of the appellant company.The assessee placed reliance on the
judicial pronouncements of Beekay Engg.Corpn(323ITR252),SRFLtd.(34SOT1),Yum Restauran
-ts(India)(P.)Ltd.(224 CTR383).It also produced the copy of bill/voucher of PPPL for the month
of June '08 showing such reduction of Rs.3,31,574/- from processing charges payable to the
assessee and stated that adjustment was as per Accounting standard-V.
After considering the submissions of the assessee the FAA held that the expenditure related to
the business of the assessee,that he had not appreciated the full facts in its entirety,that the
expenditure was related to reduction of gross receipts on account of scrap empties recovery,that
as per the policy and terms and conditions of the principal if such empties were not returned the
principal was entitle to deduct the corresponding amount from the gross payment made to the
assessee,that it was liable for such business responsibility which could not be presumed to be
other than business consideration.Considering the business activities, manufacturing, distant
place of business,the FAA held that the expenditure was genuine.He further held that most of the
gunny bags and empties were lost or became obsolete or utilised in the business premises for
restoring the goods, keeping safe the inventory or utilization of the such empties by the
employees or workers,that possibility of such happenings could not be denied.Finally,he held


that the expenditure claimed by the assessee was allowable expenditure,that during the year
under appeal the liability got crystallised,that PPPL had deducted the disputed amount.
3.3.Before us,the DR supported the order of the AO and stated that necessary details were not
filed before the AO.The AR relied upon the order of the FAA.
We have heard the rival submission and have perused the material before us.It is found that the
assessee had not produced any documentary evidence in support of its claim,that during the
appellate proceedings it furnished bill/vouchers and the FAA considering those documents
granted relief to the assessee.But,as per the provisions of Rule 46A of the Income-tax Rules,1962
the FAA is required to forward the new evidences to the AO or has to admit the same under sub
rule 4 of the Rules. We do find that the FAA has not followed any of the sub section of the Rule
46A and has decided the matter without calling for remand report from the AO.Therefore,in the
interest of justice,we are remitting back the matter to the file of the AO for limited purpose of
verification of the bills/vouchers not produced before him and furnished to the FAA for the first
time.Ground no.2 is decided in favour of the AO,in part.

4.Next ground is deals with the disallowance of Rs.8,37,979/-,being expenses on account of
mixing supervision and packing supervision.During the assessment proceedings,the AO found
that the assessee had made payment of Rs.5,49,200/-under the head "Mixing Supervision
Expenses". He asked it to explain the nature of the Expense along with supporting bills /
vouchers. The assessee submitted salary statement for the month of April, 2008. On verification
of the same,the AO foudnt that the persons whom payment was made were not the employees of
the assessee,that they were rendering technical services and supervising the mixing process,that
the mixing supervising charges have been made to Deepak Ramesh Praiapati and Gaindlal,that
packing supervision charge of Rs.3,56,143/- were made ot Krishnakant Kodwani and others.The
AO held that such payments were relating to the job which was technical in nature hence same
was to be regarded fees for professional or technical services.Referring to the provisions of
section 194 J and explanation 2 clause (vii) of subsection 1 of Section 9 of the Act,he disallowed
the entire expenditure totaling to Rs.8,37,979/-.
4.1.Before the FAA,the assessee submitted that it had divided its processes of manufacturing and
the human interference under each process was hired upon to achieve the maximum precision,
that supervision charges were paid towards the labor charges and TDS @ of 1% was deducted as
there was no expertise or technical qualification required,that manufacturing processes was very
standardized and documented,that PPPL personnel would come on sporadic visit,that charges
were paid to contract labours who would load the material in the mixing machine or would pack
the material,that it had deducted TDS u/s.194C of the Act,that the accounts of the assessee was
subject to the tax audit u/s. 44AB,that no adverse comment was placed by the auditors in that
regard,that AO,before reaching to the conclusion of the services being of professional/technical
nature,did not bring anything on record to prove his allegation, that no opportunity was provided
to the assessee to put forth its contention.After considering the submissions of the assessee and
the assessment order,the FAA held that the supervision charges paid for a contractual obligation
were labour charges,that the mixing supervision and packing supervision was not related to any
technical inputs nor was for the rendering of any managerial, technical or consultancy services,
that it was related to a supervisory work ensuring the production as per the specification or
requirement given by PPPL,that the AO had wrongly presumed that the assessee had incurred
such expenses as a fees for professional service or fees for technical services,that the payments


were in the nature of labour charges and it had rightly made TDS @1 % as deductible u/s.194C
of the Act,that unless contrary evidence was brought on record no disallowance of expenditure
u/s.40(a)(ia) could be made.He referred to the cases of M/s. S. K. Tekriwal(ITA No.1135/
Kol/2010),M/s Chandaboy & Jassobhoy(ITA No.20/Mum/2010),Ratnakar Sawant, Dinesh N.
Shah & Company(ITA No. 2941/Mum/2011)and held that the AO had wrongly presumed that
such contractual payment was fees for technical or professional services.Finally,he deleted the
disallowance made by the AO.
4.2.Before us,the DR supported the order of the AO.The AR stated that services received by the
assessee were not in the nature of technical or consultancy,that it was a labour contract payment
and the assessee had deducted tax as per the provisions of the Act.
4.3.We have heard the rival submissions.We find that the AO had made the disallowance as he
was of the opinion that mixing supervision and packing supervision fell in the category of fees
for technical services.He invoked the provisions of section 9(1)(vii)r.w.s.194J and 40(a)(ia)of the
Act.We find that he has not elaborated as to how the mixing and packing supervision can be
termed fees for technical services-a term having its definite meaning.In our opinion,the FAA has
rightly held that it was a pure and simple labour contract and was covered by the provisions of
section 194C of the Act.We do not want to disturb his order,so,confirming the same ground no.3
is decided against the AO.

5.Last Ground is related to disallowance of loading and unloading expenses of Rs.11,76,080/-
made u/s.40(a)(ia) of the Act.According to the AO there were various parties to whom loading
expenses more that Rs.50,000/-were paid.He held that in such cases the provision of Section
194C were attracted.According to the AO the assessee had furnished the details of appearing in
the ledger account vide its letter dated 24.10.2011 but thereafter it had neither attended nor had
made any explanation regarding the applicability of Section 194C.The AO held that TDS had
not been made in respect of loading expenses,that same had to be disallowed u/s.40(a)(ia) of the
5.1.During the appellant proceedings before the FAA,it is argued that the loading expenses were incurred when the finished products were sent to various wholesalers and retailers for sale,that the unloading expenses were incurred when the various raw materials were received from PPPL for manufacturing process,that all the payments were made to persons who were daily wage earners and unskilled persons,that for them vouchers were made and signatures were obtained, that during the course of assessment proceedings ledger copy of the said expenses was produced before the AO,that the AO based on an analysis of the ledgers and based on the names mentioned in the narrations worked out the payments made to various parties and made the disallowance u/s 40(a)(ia) r.w.s. 194C of the Act.The assessee relied upon the cases of Indian Road Lines,Kalindi Agro Biotech Ltd.(7 ITR-TribJ 249),Deewan Chand (178 Taxmann 173),Laxrni Protein Products P Ltd.(3 ITR-Trib 768),R.R. Carrying Corporation (126 TTJ240),Chandrakant Thakkar(129 TTJ1). The FAA held that recurring payments had been made to a daily labourers who were unskilled persons,that such payments were made through vouchers,that the AO had not doubted the genuineness of such expenditures,tht he disallowed the same merely on the presumption that there was a contract of such loading and unloading,that there was no such visible contract,that it was a recurring expenditure borne at the time of its incurrence on day to day basis,that such expenditure was not hit by the provisions of law u/s.194C r.w.s.40(a)(ia)of the Act,that no such 5 ITA/7150/Mum/2012-AY.2009-10,MFPL contracts would be entered in to in respect of day to day recurring expenditure. Highlighting the basic ingredients of a contract,he held that in assessee's case none of the conditions were satisfied,that there was no agreement between the assessee and the loaders,that provisions of section 194 C were not applicable.Finally,he held that the AO had wrongly disallowed the loading expenditure for want of TDS. 5.2.Before us,the DR and the AR relied upon the orders of the AO and the FAA respectively. We find that the AO had made the disallowance as he was of the opinion that the loading and unloading charges were covered by the provisions of section 194 C of the Act and that the assessee was liable to deduct tax for such payments.The assessee had made payments for loading and unloading to the unskilled daily labourers and there was no contract between the two parties.It had produced the necessary documents along with the vouchers before the AO. Therefore,there was no justification in holding that the payments were covered by Section 194C of the Act and the assessee had to deduct tax at source.Therefore, in our opinion,the order of the FAA does not suffer from any legal or factual infirmity.Confirming his order,we decide ground no.4 against the AO. As a result,appeal filed by the AO stands partly allowed. . Order pronounced in the open court on 22nd July,2015. 22nd ,2015 Sd/- Sd/- ( /Joginder Singh) ( / RAJENDRA) / JUDICIAL MEMBER / ACCOUNTANT MEMBER /Mumbai, /Date: 22.07.2015 . ..Jv.Sr.PS. /Copy of the Order forwarded to : 1.Appellant / 2. Respondent / 3.The concerned CIT(A)/ , 4.The concerned CIT / 5.DR A Bench, ITAT, Mumbai / , ,.. . 6.Guard File/ //True Copy// / BY ORDER, / Dy./Asst. Registrar , /ITAT, Mumbai. 6
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